The Apothecary, a blog about health care and entitlement reform, is edited by Avik Roy, a Senior Fellow at the Manhattan Institute for Policy Research and a former health-care policy adviser to Mitt Romney. Avik also writes a weekly column on politics and policy for National Review.
The other contributors to The Apothecary are: Josh Archambault, Director of Health Care Policy at the Pioneer Institute in Boston; Robert Book of the American Action Forum; Chris Conover, Research Scholar in the Center for Health Policy and Inequalities Research at Duke University and an Adjunct Scholar at the American Enterprise Institute; Nicole Fisher of the University of North Carolina; John R. Graham of the Advanced Medical Technology Association; and Jeet Guram of Harvard Medical School.

Obama Touts False Benefits Of Health Insurance Rebates

Today, both at a press conference and on the White House web site, the President touted the “success” of his health care law in part due to the law’s Medical Loss Ratio (MLR) rule. The rule specifies that insurers spend a minimum percentage of their premiums on paying medical costs, as opposed to other costs – and to pay a rebate to consumers if the medical costs turned out, at the end of the year, to be “too low” as a percentage of the premiums In the individual and small-employer markets, the minimum MLR is 80%; for large employers the minimum is 85%. (For employers, the rule applies only to fully insured health plans; the self-funded plans offered by most large employers are exempt.)

According to the White House, 8.5 million Americans will receive rebates for 2012 totaling $500 million, which works out to about $59 per person – or less than 0.02% (that is, less than two cents for every $100) of total healthcare spending in the U.S.

The White House refers to this with the title “Obamacare in Three Words: Saving People Money,” but even that paltry “savings” is not really savings – because the MLR, perhaps unintentionally, actually encourages insures to increase premiums. And that increase is, in general, about 25% higher than the rebate that ends up being paid. So, it’s quite possible that those $59 rebates were paid for with $74 in increased average premiums.

One reason – as I explained back in April – is that the MLR rule bases the rebate on a percentage of the premium, not on a percentage of medical costs. That means that an insurer who is constrained to keeping 20% of the premium can make more money by raising the premium and paying a higher rebate. For example, if average medical costs are $8,000 per family, the insurer could charge a premium of $10,000 and owe no rebate, leaving $2,000 for administrative costs and profit. Alternatively, they could charge a premium of $11,000. Assuming medical care costs still average $8,000, they would owe rebate of $800 to bring their total loss ratio to 80% of $11,000. This would leave them with $2,200 for administrative cost and profit – a gain of $200 compared to the no-rebate case. In general, for every extra dollar of premiums, the insurer can rebate 80 cents and keep 20 cents. Furthermore, if the insurer can increase medical costs – say, by paying doctors more – it can keep 25 cents for every additional dollar of medical costs.

In a competitive market this wouldn’t happen, since consumers would realize they are losing 25 cents for every dollar of rebate they get, and insurers would have to compete by keeping premiums low – and therefore keeping rebates and medical costs low.

However, even in a competitive market, the MLR requirement could still require insurers to set higher premiums. Why? The amount insurance companies have to pay varies from year to year, and in some years could be higher than the amount of premiums collected. To avoid going bankrupt in high-cost years, companies have to set aside reserves in low-cost years. This is not just prudent from a business perspective; it is also required by law in most states. But the MLR makes that more difficult. In low-cost years, insurers will have to pay rebates, making it more difficult to set aside enough reserves. The only way to make up for that is to increase premiums.

As depressing as all this sounds, it could turn out to be much worse. When the Obamacare subsidies go into effect (scheduled for 2014, unless the administration tries to delay it), the substantial percentage of consumers who are eligible for subsidies will pay a percentage of their income, and have the rest of the premium subsidized. That means, in effect, that they won’t care what the real premium is. They will be completely insulated from high premiums – but they will still – if the statute is read literally – get that rebate. In other words, they will get a fat taxpayer-funded subsidy to cover their insurance, and then a substantial rebate, which might even exceed the premium they paid. The MLR system – intended to keep premiums low – could end up becoming a system for funneling taxpayer dollars to subsidized consumers, all the while increasing the profits of insurers permitted to participate in the exchanges above what they could earn in a competitive market.

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This is the kind of example I have been waiting to hear about: what are the potential avenues for abuse of the new system that would result in cash benefits to subsidized subscribers?

I’ve been wondering who would sign up for the exchanges and abuse the no-doc system if the only benefit was subsidized healthcare. There are only so many people sick enough to be willing to deal with the bureaucracy and low level of service the exchange policies will provide. And subsidies supposedly go straight to the insurer, so that wasn’t an incentive.

But if there is a demonstrated opportunity to get cash-back from the exchange system, people will be much more likely to sign on. And you know this is one reason insurers even stayed in the game: the administration assured them of a law that would allow loopholes to maintain profit ‘on the sly’ and simultaneously allow the administration to claim credit for punishing insurers and rescuing the consumer.

To be noted is that hospitals and insurers control about 50% of healthcare spending, check this easily. This is where the problem lies. Dr’s have lost out and can no longer afford the heavy practice cost in regulation, malpractice, etc, but hospitals and insurers have the infrastructure, lawyers and lobbying. Insurers merely add their admin and profit costs to the hospital’s, where there is hardly any competition or forces to bring down cost except for large employer plans. Large employer plans’ admin costs are about 5%, and Medicare is less than 5%. The same contractors for Medicare are usually these same large insurers, and to the extent there is fraud or abuse, it would have to be through these same contractors in Medicare.

Subsidies come from taxpayers, not from the Exchange subscriber. The IRS pays subsidies directly to insurers in advance when subscriber signs up? Why should subscriber get a rebate from subsidy? And what if subsidies are overstated? who benefits?